project appraisal 09

8/2/2019 Project Appraisal 09

1/45

PROJECT APPRAISAL


2/45

CONCEPT OF PROJECT

APPRAISAL

Simply speaking, project appraisal means the

assessment of a project. Project appraisal is made forboth proposed and executed projects.

In case of former, project appraisal is called 'ex-ante

analysis'and in case of latter 'post-ante analysis'. Here, project appraisal relates to a proposed project.


3/45

Project appraisal is a costs and

benefits analysis of differentaspects of proposed project with

an objective to adjudge itsviability.


4/45

A project involves employment

of scarce resources. Anentrepreneur needs to appraise

various alternative projectsbefore allocating the scarce

resources for the best project.


5/45

Thus, project appraisal helpsselect the best project among

available alternative projects.


6/45

For appraising a project, itseconomic, financial, technical,

market, managerial and socialaspects are analyzed.


7/45

Financial institutions do projectappraisal to assess its credit-

worthiness before extending

finance to a project.


8/45

For a financial institution, project appraisal is aprocess whereby a leading financial institutionmakes an independent and objective assessment of

the various aspects of aspects of an investmentproposition for arriving at a financial decision andis aimed at determining the viability of a projectand sometimes, also in modifying its scope andcontent so as to improve its viability.

However, sometimes project appraisal and projectevaluation are used interchangeably.


9/45

METHODS OF PROJECT

APPRAISAL Appraisal of a proposed project

includes the following analyses:

1. Economic Analysis

2. Financial Analysis

3. Market Analysis

4. Technical Feasibility

5. Managerial Competence


10/45

1. Economic Analysis

Under economic analysis, the aspects

highlighted include requirements for raw

material, level of capacity utilization,anticipated sales, anticipated expenses and

the probable profits.


11/45

It is said that a business should have

always a volume of profit clearly in

view which will govern other

economic variables like sales,purchases, expenses and alike.


12/45

It will have to be calculated how

much sales would be necessary to

earn the targeted profit.


13/45

Undoubtedly, demand for theproduct will be estimated for

anticipating sales volume.


14/45

Therefore, demand for theproduct needs to be carefully

spelt out as it is, to a great extent,

deciding factor of feasibility of

the project concern.


15/45

In addition to above, the location

of the enterprise decided afterconsidering a gamut of points

also needs to be mentioned in theproject.


16/45

The Government policies in this

regard should be taken into

consideration.


17/45

The Government offers specificincentives and concessions for

setting up industries in notified

backward areas.


18/45

Therefore, it has to be ascertained

whether the proposed enterprisecomes under this category or not and

whether the Government has already

decided any specific location for thiskind of enterprise.


19/45

2. Financial Analysis

Finance is one of the most important pre-

requisites to establish an enterprise.


20/45

It is finance only that facilitates

an entrepreneur to bring togetherthe labour of one, machine of

another and raw material of yetanother to combine them to

produce goods.


21/45

In order to adjudge the financial

viability of the project, thefollowing aspects need to be

carefully analyzed:


22/45

a. Assessment of the financialrequirements both - fixed

capital and working capital -

need to be properly made.


23/45

b. In accounting, working capital means

excess of current assets over currentliabilities. Current assets refer to those assets,

which can be converted into cash within a

period of one week. Current liabilities refer tothose obligations which can be payable within

a period of one week.


24/45

3. Market Analysis

Before the production actually starts, the

entrepreneur needs to anticipate the possible

market for the product.

He/she has to anticipate who will be the

possible customers for his product andwhere and when his product will be sold.


25/45

This is because production has no value

for the producer unless it is sold.

It is said that if the proof of pudding lies

in eating, the proof of all production lies

in marketing/ consumption.

In fact, the potential of the market

constitutes the determinant of probable

rewards from entrepreneurial career.


26/45

4. Technical Feasibility

While making project appraisal, the technical feasibility ofthe project also needs to be taken into consideration.

In the simplest sense, technical feasibility implies to meanthe adequacy of the proposed plant and equipment toproduce the product within the prescribed norms.

As regards know-how, it denotes the availability orotherwise of a fund of knowledge to man the proposedplants and machinery.


27/45

It should be ensured whether thatknow-how is available with the

entrepreneur or is to be procuredfrom elsewhere.


28/45

In the latter case, arrangementmade to procure it should be

clearly checked up.


29/45

If project requires anycollaboration, then, the terms and

conditions of the collaboration

should also be spelt out

comprehensively and carefully.


30/45

In case of foreign technical

collaboration, one needs to be awareof the legal provisions in force from

time to time specifying the list of

products for which only suchcollaboration is allowed under

specific terms and conditions.


31/45

The entrepreneur, therefore,

contemplating for foreigncollaboration should check these

legal provisions with reference totheir projects.


32/45

While assessing the technical feasibility of the project,

the following inputs covered in the project should also

be taken into consideration:

1. Availability of land and site.

2. Availability of other inputs like water, power, transport,

communication facilities.3. Availability of servicing facilities like machine shops,

electric repair shop, etc.

4. Coping-with anti-pollution law.

5. Availability of work force as per required skill and

arrangements proposed for training-in-plant and outside.6. Availability of required raw material as per quantity and

quality.


33/45

5. Management Competence

Management ability or competence plays an

important role in making an enterprise a

success or otherwise.


34/45

Strictly speaking, in the absenceof managerial competence, the

projects, which are otherwisefeasible, may fail.


35/45

On the contrary, even a poorproject may become a successful

one with good managerial ability.


36/45

Hence, while doing project

appraisal, the managerialcompetence or talent of the

promoter should be taken intoconsideration.


37/45

Research studies report that mostof the enterprises fall sick

because of lack of managerial

competence or mismanagement.


38/45

TECHNO ECONOMIC

INNOVATION AND

FEASIBILITY STUDY


39/45

A feasibility study is a preliminarystudy undertaken before the real work of aproject starts to ascertain the likelihood of the

project's success.

It is an analysis of all possible solutions to a

problem and a recommendation on the best

solution to use.

It involves evaluating how the solution will

fit into the corporation.


40/45

TECHNO ECONOMIC INNOVATION AND

FEASIBILITY STUDY

Definition: Techno Economic Feasibility

examines the possibility of manufacturing theend product in the pre determined quantity withdesired quality and the sale of the same resultsinto adequate return to pay back the investmentmade within a reasonable period of time overthe project life with the help of the facilitiesinstalled and resources employed.


41/45

TECHNO-ECONOMIC

PROJECTS: Projects classification based on techno-

economic characteristics fallin this

category.

This type of classification includes factorsintensity-oriented classification,causation- oriented classificationandmagnitude-oriented classification.

( ) F I i O i d


42/45

(a) Factor Intensity-Oriented

Classification:

Based on factor intensity classification,

projects may be classified as capital intensive

or labor intensive.

If large investment is made in plant andmachinery, the projects will be termed as

'capital-intensive'.

On the contrary, projects involving largenumber of human resources will be termed as

"labor intensive'.

(b) C ti O i t d


43/45

(b) Causation-Oriented

Classification:

Where causation is used as a basis ofclassification, projects may be classified as

demand based or raw material based projects.

The very existence of demand for certain goods

or services, makes the project demand-based andthe availability of certain raw materials, skills orother inputs makes the project raw material-based


44/45

(c) Magnitude-Oriented

Classification:

In case of magnitude-oriented classification,based on the size of investment involved in theprojects, the projects are classified into large scale,medium-scale or small-scale projects.


45/45

Project classification based ontechno-economic characteristics is

found useful in facilitating the

process of feasibility appraisal of theproject.

project appraisal 09

Documents